23 Jun Interest Rates Many managers do not understand the various ways that interest rates can affect business decisions. For example, if your company decided to build a plant
Please answer part 1 and part 2 in 350 word limit in APA format with text citations.
Also need to reply to 3 classmates posts with 150 word limit each (Classmates posts are attached)
Part 1: Interest Rates
Many managers do not understand the various ways that interest rates can affect business decisions. For example, if your company decided to build a plant with a 30-year life and short-term debt financing (renewed annually), the cost of the plant could skyrocket if interest rates were to return to their previous highs of 12% to 14%. On the other hand, locking into high, long-term rates could be very costly also with a long period when low short-term interest rates were to be available. As you can see, the ability to know your economic environment and its impact on projected interest rates can be crucial to making good financing decisions.
Describe two to three macroeconomic factors that influence interest rates in general. Explain the effects of each factor on interest rates.
Now think about the industry in which you are employed or one in which you have past experience. To what macroeconomic factors is your industry most sensitive?
Describe two contemporary factors that seem to be impacting your industry today, and identify their impacts on the interest rates experienced within your chosen industry.
Part 2: Stock Valuation, Risk and Returns
Stock valuation
Dividend Discount Model Stock Valuation
How to value a company using discounted cash flow (DCF)
Stock Valuation and Investment Decisions
https://www.youtube.com/watch?v=3BIIiUyr3-w(vidoe link)
The links above contain information on stock valuation, risk, and returns. Please review each one of them. Based on the knowledge gained from the materials presented in the links above, complete the following activities:
Present a detailed discussion of what you learned about stock valuation. Provide examples of how your company has used the concepts. Do you believe financing a company's operation using stock is better than financing with bonds? Why or why not? Support your discussion with a numerical example.
Based on the materials presented in the “Risk and Return” video, present a discussion on why the materials are important in financial decision-making. How would you incorporate risk and return in your financing decisions?
Classmate 1:
Part 1
The change in interest rates greatly impact the economy of a nation. If the interest rates are high, it would mean people would incur high costs of borrowing funds while investors will be getting more return on their investments. Interest rates gives important highlights about the financial health plus economy of a country. Macroeconomic factors tend to impact interest rates along with several other factors. If the costs are beginning to rise and there is devaluation of certain currency, then this eventually results in interest rates soaring. Looking at the dynamics of a country, if the rate of employment is less then this would also impact interest rate. Interest rates show an inverse relation with the rate of unemployment as most of the people are not employed. Much more loans would be provided to people to start working by opening small businesses or ventures (Dewachter & Lyrio, 2006). When I was working on a contract at an oil and gas marketing company, it was greatly impacted by inflation, exchange rate, rate of unemployment, etc. Even if any change incurs in the international market it tends to impact domestic markets especially commodities like oil and gas are greatly impacted by global changes. The price of oil and gas are linked with inflation directly.
Part 2
Each business holds an intrinsic value. These numbers are based on the cash movements which are gathered at a specific operating time. Considering and incorporating the learning of time value of money, fixed rate is needed to find free cash flow discounts. The main rule of thus valuation is that the business needs to be equaling to the prospective cash flows. The main reason for discounting cash flows is due to discounting. When the future cash flows and rate tends to be calculated then the amount is required to be figured. This is a complex method and this process of finding value of a stock is considered an art. There are a few methods like price earnings ratio which could be easily figured but these are helpful plus appliable in a few cases. Dividend is referred to as the return received by investors. The earning way is utilized for figuring if the business is paying dividend (Sharafoddin & Emsia, 2016). Debt financing is regarded as the better way to raise finance. Equity is also a good way but a balance of both will be ideal. When company sells shares, they sell a part of their ownership. Also, looking at the concept of WACC, cost of debt is less than cost of equity. Businesses tend to get the tax benefit with debt financing (Boubakri & Ghouma, 2010). The concept of risk and return hold immense importance in the investment world. If any investment is risky, it means more returns. Beta tends to play a crucial role in figuring return of investment related to the market. In cases beta is high it means more volatile stock hence high returns. All these concepts are crucial for making the right financial decisions (Gombola & Marciukaityte, 2007).
Classmate 2:
There are many factors that could change the economic growth of a society or an organization or even a country. But there are few that have a significant impact on the economy, and they are as follows:
· Inflation
· Loan tenure
· Borrower’s financial health
The industry that I would like to focus on when it comes to the macroeconomic factors is the Banking industry. The most important factor that the banking industry is most affected by is Inflation. If there is no stability in income and there are high’s and low’s in the economy then that could lead to a major change in the interest rates. There are high chances that the rates could go higher and hence the borrowing power of an individual would also fluctuate. Interest rates are always changing into the business and managers should understand the key causes and prevent the uncertain impacts on the overall productivity (Cheung, 2019).
If the borrower is trying to start up a loan which is actually not a big amount and if the interest rates are high then the chances of approval of loan for the borrower might not be as much as they should be. There are high chances that it could get rejected.
Supply and demand are two factors that can affect any industry and specially the banking industry too. If we take real estate then if the land prices go down, there would be more number of borrowers which would mean more number of loans that have to be sanctioned.
Profitability and stock valuation have been discussed in this video and they are concepts that would have to be looked at in an organization. The management has to make decisions based mainly on how the profit margins might vary if a step is taken and how they can make changes to that particular step if anything doesn’t work out.
Classmate 3:
Part 1 – Interest Rates
Interest rates can directly impact the performance of the company in number of ways and managers should understand how it changes and what are the ways to overcome the challenges. It refers to the cost of borrowing money which mainly deals with the number of challenges which could impacts the performance of the business. Managers should focus on the different ways to deals with changing interest rates and based on that takes further decisions towards the existing goals. Interest rates are always changing into the business and managers should understand the key causes and prevent the uncertain impacts on the overall productivity (Cheung, 2019).
There are number of microeconomic factors which may affects the interest rates and required careful attention from the managers to deals with uncertain challenges. Based on the supply and demand interest rates may vary and ensures that it should not impacts the profit margin of the company. Some of the key factors which impacts the interest rates are: Supply and Demand, Inflation, Government policies. Inflation can impact the interest rates directly and needs to work on back-up plans towards the handling greater challenges. Interest rates can keep the economy moving and focus on most important areas to be covered and develop the best approach towards the long-term profitability (Hassan, Hoque & Osman, 2019).
Part 2 – Stock Valuation, Risk and Return
With the help of stock valuable tools into the business, decision-makers can take the informed decisions and focus on profitability. To determine the value of a company and focus on better financial approach, it is significant to work on stock valuation and follow the better approach. Investors can understand the potential market price and based on that focus on further approach to invest into the stocks. When it comes to the risk and return, both are highly corelates to each other and goes hand-in-hand towards the better profitability. When organizations are willing to take greater risk then they can be able to get higher rate of return without fail. Hence, both are crucial for the business and involved in taking the informed decisions for the business (Jacoby, Paseka & Wang, 2017).
There will be straightforward methods for valuation, while others will be more tricky and difficult. Therefore, there will be no one protocol that will be precisely fitted for every circumstance. Hence, we have to follow different procedures for different situations. Because each commodity will be of various stocks, each business or area will have unique factors that may expect many valuation techniques. Here in this analysis, the extensively popular methods of valuation and how to utilize them properly. There will be various techniques to respect a business or its commodity, verifying every positive and negative. Several varieties attempt to lead the profitability businesses' inherent significance established on its monetary proclamations and their undertakings (Song, Li, & Fang, 2021).
